Assume that the broadcast world priced its inventory at a $15.00 CPM (cost per thousand viewers).
And then assume that only 1% of the buying public in a given DMA is shopping for a car, sofa, fridge, equity loan, windows or a bankruptcy attorney. (Typically in a stable economy, this number is 2%.) Further assume that the advertiser, be it the auto dealer, appliance retailer, financial institution, home improvement retailer or attorney attracts, or converts, only 2% (a very conservative 1 in 50) of the aforementioned 1% of those that are shopping in that category into leads.
Finally, and thanks for playing along, assume that the close ratio of these businesses is 25% — 1 in 4 is neither aggressive nor is it conservative, it’s fair.
This scenario plays itself out everyday in the broadcast industry. And here’s where it gets interesting. All this math yields a cost per lead of $75 and a cost per sale of $300.
Check my math:
- $15 per thousand (viewers) x 1% (total shoppers) = $15 to get 10 shoppers
- So, we have 10 shoppers in total per thousand viewers in any given merchandise of service category.
- Then we have to factor in all the competition in a given category of that business. So we’ll get REAL conservative and say that only 2% of the 1% will shop a given advertiser’s business.
Now we have:
.02 x 10 shoppers = 0.2 leads for every $15 spent. And since fractional shoppers are hard to find, don’t fit real well in cars, can’t open refrigerators and would never get approved for a loan, we’ll revise the math to reflect a whole shopper:
$15 = 0.2 leads, so $75 = 1 whole shopper (or 1 lead)
Yes, there it is. One lead costs $75 when broadcast prices its inventory at a $15 CPM. (And yes, if you’re wondering, a $10 CPM — not at all rare price range for some markets today – yields a $50 cost per shopper/lead.)
Back to the $15 cpm, we then apply the close ratio of 25% and get a cost per sale of $300(Remember, at a 25% close ratio, it takes 4 shoppers at $75 per shopper to get one sale).
So, who cares? You might. Read on, because here’s where it gets somewhat interesting:
A business that uses Google at a $2.00 CPC (cost per click) and counts on the internet’s paid lead average of 2% lead conversion rate and the same close ratio as above (25%) yields a cost per lead of $100 and a cost per sale of $400.
In case you didn’t get the math:
$2.00 CPC x 2% conversion rate yields 20 leads per $2000, or $100 per lead. Then employing the same close ratio of 25% yields a $400 cost per sale
Sooooooooo, to dumb it down for folks like me:
- The ratio of a broadcast $15 CPM to the cost of a sale is $15:$300. A $1 increase in CPM yields a $20 increase in cost per sale. Each $1 decrease in CPM yields a $20 decrease in cost per sale.
- The ratio of a Google $2 CPC to the cost of a sale is $2:$400. Each $1 increase in CPC yields $200 increase in cost per sale.
Anything above a CPC of $2.00 is suddenly very inefficient when compared to broadcast television. And we should all know this and be educating our clients to this math.
Yet, when I look at the CPC of an array of keywords in the Legal category in Indianapolis, I see CPC’s ranging from $2.75 to $22.11. At a $2.75 CPC, Google charges the average attorney $550 for a case. And yes, at a $22.11 CPC, Google has the ability to charge an attorney $4,422 per case. Meanwhile, dopey old broadcast television at $15 CPM charges that same attorney $300 per case.
By the way. Let’s not forget that 75% of all the inquiry activity on Google occurs within the organic listings and not their paid listings. And further, 1/3 of all online inquiry is driven by off-line media. And guess what… Dopey old broadcast television ranks #1 out of all the off-line media in driving on-line inquiry.
All this and broadcast television — in many instances not knowing the above ‘search math’ – tells their clients that Google is a good choice and then apologizes for recommending a $15 CPM on their broadcast proposal.
Did I hear recently that some $14 billion went to search?
Shame on the broadcast sales industry for letting this persist. It’s no wonder now to me why Wall Street has labeled broadcast ‘no growth’. We may as well just be labeled ‘no brains’ as well.
Our clients are in need of solutions. How can we help them if we don’t know this basic, yet critical math?
Roland Eckstein is the Managing Partner of ESA & Company, an advertising strategy firm that accelerates profit and growth for local businesses.